During the life of a pension plan (irrespective of type and size), there are bound to be times when the plan administrator considers delegating some or all of its administrative responsibilities to an employee or a pension committee, or to an external third-party service provider.
An outsourcing arrangement can typically be divided into three components:
• decision and selection;
• outsourcing arrangement in action; and
• termination of outsourcing arrangement.
Decisions, Decisions
Most pension legislation expressly provides a plan administrator with the authority to delegate its responsibilities when it is reasonable and prudent to do so. For example, Subsection 22(5) of the Pension Benefits Act (Ontario) provides the plan administrator with a broad authority to delegate when it is reasonable and prudent in the circumstances. But a plan administrator needs to be sensitive to the circumstances in which delegation of responsibility is warranted. Here are some typical situations where it is appropriate for a plan administrator to outsource its responsibilities.
• The plan administrator does not have the skill or knowledge to perform the administrative task.
• There is inadequate personnel to handle the daily administrative duties.
• It is more cost-effective (in terms of expenses, HR and time com- mitment) to have a third-party service provider performing the tasks.
But the decision to outsource is only the start. Once the decision is made, the plan administrator needs to determine the extent of delegating its responsibilities and the criteria for selecting a service provider. This begins with personally selecting the provider, subject to the standard of care imposed by the pension legislation. The administrator needs to consider the appropriate selection process (e.g., a request for proposal or approaching service providers well known in the industry or based on recommendations from others) and the qualifications of the provider. In assessing the service provider’s qualifications, the administrator must consider specific circumstances and pension plan needs.
The administrator must also take into account outsourcing differences depending on the plan type. Take the defined contribution (DC) environment where members direct the investment of contributions made on their behalf. If the administrator desires a one-stop service provider to assist in discharging the administrative duties of handling all member communications and keeping plan records while at the same time offering appropriate investment options, the potential provider must have the ability to meet all these needs.
However, in a defined benefit (DB) plan context, the ability to provide investment information to members is not relevant. If the administrator is not able to find a one-stop service provider, an investment manager may be required to assist in investing pension fund assets and a consultant or an HR company to handle member communication and provide recordkeeping services.
Some pension regulators set out in their policy bulletins the considerations they expect an administrator to take into account when selecting a service provider. Questions to consider include the following:
• Does the provider have the required skill and experience?
• Is there any conflict of interest?
• Does the provider have sufficient financial resources for a stable relationship?
• Are the provider’s fees reasonable?
• Is the provider capable of providing transitional services when the outsourcing arrangement terminates?
The administrator must also document the selection process to substantiate that it has discharged the duty of care required of the administrator in the selection of the service provider.
As a matter of good governance, the administrator should also document the outsourcing arrangement. Most service providers have their standard forms of service agreement. Should there be any concerns with any of these provisions, they need to be addressed upfront before the agreement is signed. Following are two examples of issues that an administrator may encounter.
Exemption from and limitation on the service provider’s liability. This provision can take the form of a general exemption from liability (except in cases of gross negligence or wilful default) and/or a monetary cap on liability (e.g., cap based on the fees paid to the service provider). An administrator may find such exemption and limitation provisions unpalatable as it relies on, and pays for, the professional skill of the service provider.
Unilateral right of the service provider to make changes to the agreement. This type of provision is quite common in some standard service agreements. If an administrator does not like the change, its only recourse is to terminate the agreement. Typically, an agreement requires prior notice for unilateral termination by a party. The administrator needs to ensure that the notice requirement is not so onerous that it prevents the administrator from exiting the arrangement within a reasonably short period when there is an unacceptable unilateral change imposed by the service provider.
Outsourcing in Action
Once the outsourcing arrangement is in place, the administrator has a continued duty to supervise and monitor the service provider’s performance. Despite the outsourcing arrangement, the administrator is the legal administrator for the purpose of the pension legislation and is accountable for any errors made in administration. To discharge the supervisory duty, regular periodic reporting and performance evaluation mechanisms are essential.
Reporting may take the form of written reports or verbal presentations, or both. An administrator sometimes requires the service provider to supply compliance certification on a periodic basis, in addition to regular reporting.
An administrator should not overlook the significance of regular performance evaluation of the service provider. The criteria for performance evaluation will likely be the same as the selection criteria. One challenge for the administrator is making a decision on the appropriate next step if the performance evaluation is unsatisfactory. Sometimes that next step may be the termination of the arrangement. It is unlikely that an administrator can discharge its duty of care by mere inaction in response to unsatisfactory performance.
Termination
When an outsourcing arrangement is terminated, a smooth transition (and as seamless as possible from the plan members’ perspective) is key. Potential termination issues are best dealt with upfront by including a detailed termination provision in the service agreement.
Each component of the outsourcing process is as important as the others and has its own relevant considerations and possible hurdles. Nevertheless, all these considerations and hurdles need to be properly addressed by the plan administrator in order to discharge its duty of care. BC
Sonia T. Mak is a partner with Borden Ladner Gervais LLP in the pension and benefits group. smak@blgcanada.com
Get a PDF of this article
© Copyright 2010 Rogers Publishing Ltd. This article first appeared in the November 2010 edition of BENEFITS CANADA magazine.